Does transnational terrorism reduce foreign direct investment? Business-related versus non-business-related terrorism

Abstract

Although several existing studies examine the economic impact of transnational terrorism by referring to its potential to reduce foreign direct investment (FDI), they overlook possible differences in the effects of business-related and non-business-related terrorism. We argue that the former type of terror negatively affects FDI since it damages multinationals’ buildings, destroys their products, kills their employees, and causes a rise in insurance premiums. The latter type of terror, however, does not induce the same ramifications and should thus have little or less influence on a country’s FDI. In order to examine the effects of these two different types of transnational terrorism, we employ three different statistical techniques using data gleaned from the International Terrorism: Attributes of Terrorist Events (ITERATE) dataset. A cross-sectional, time-series data analysis of 123 developing countries during the period from 1980 to 2008 reveals that transnational terrorism that harms multinational businesses contributes to a decrease of foreign investment but transnational terrorism that afflicts non-business-related targets is statistically irrelevant. This implies that when countries implement counterterrorism measures that are directly intended to mitigate the impact of business-related terrorist activities, they are likely to attract more foreign capital and should therefore realize a greater degree of economic development.